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The Aussie Dollar Dilemma

Be thankful for the bottomless gluttony of man today. It’s probably going to help Australian stocks! The US markets came out of their Turkey Coma to rally higher on Friday. Both the S&P 500 and the Dow finished more than one per cent higher. That should be good enough for a positive start to the week in Australia.

Not only are people eating like there’s no tomorrow, they’re spending that way too. Shoppers spent over a $1 billion online Friday for the first time ever, according to CNET. It was a 23% increase over last year. And in the US, they didn’t even wait for the Thanksgiving indigestion to die down. Thursday’s sales were $633 million, up 32% from last year.

What kind of appetite can never be satisfied by more food or more things? It’s not really an appetite we’re talking about. It’s the sense that something meaningful is missing in life. You try to fill up the empty spot with gravy, or a new jumper.

By the way, we don’t mean ‘bottomless gluttony’ in a pejorative sense. It is what it is. But it does remind us that Gibbon attributed the decline and fall of Rome to the use of public monies on bread and circuses. In the modern day consumer empire, there are no public monies left. It’s all on credit. But the principle of declining standards of human behaviour in the face of a system breaking down…that’s basically the same.

But as we said, at least stocks are going up. And in Australia’s case, how can they not? The currency wars favour capital flows into Australia. Japan, the US, and Europe are all deliberatus dollaerely weakening their currencies to try and boost growth and avoid debt deflation. This makes the Aussie dollar relatively stronger, and probably stronger than it ought to be based on lower commodity prices and a lower terms of trade.

However in a world of relative prices, one mustn’t stick too closely to absolutes. The Aussie dollar is strong because it is strong, whatever the reason. The more useful question is whether the strong Australian dollar is actually capping what would be a larger move in Aussie stocks prices.


Click here to enlarge

Source: StockCharts


On a year-to-date basis, a side-by-side chart of the Aussie dollar and the All Ordinaries wouldn’t tell you that much. In fact in the last year, both have tracked sideways. But let’s go back before the era of QE got underway in earnest, back to March 2009.

You can see that since then, the S&P 500 has doubled. Meanwhile, the Aussie dollar is up almost 64% against the US dollar. The All Ords are up just under 40%. Forty per cent in a few years certainly isn’t bad. But it makes you wonder, would a weaker Aussie dollar – say the Reserve Bank cut interest rates 150 basis points or so – kick off a rally in stocks?

Hmm. Lower interest rates could move savers out of conservative investments and into growth stocks. But they could also trigger capital flight – foreign investors taking their money elsewhere. This is the RBA’s dollar dilemma.

We’ll ask around the office to see if anyone has ideas about this relationship between the Aussie dollar and the All Ords. Murray’s thoughts on the matter are already pretty clear. He’s referring to a kind of financial extinction event – the sort of thing where your money dies but your body survives. In fact, he reckons the extinction event is already under way.

But extinction events aren’t anything to lose sleep over. There’s nothing you can do about them anyway.
Regards,

Dan Denning
for The Daily Reckoning Australia

From the Archives…

Why the Worst is Not Over For China’s Economy
23-11-2012 – Greg Canavan

Currency Devaluation: While Europe Gets Sinned, Australia Sins
22-11-2012 – Nick Hubble

The Pyramid of Real Wealth
21-10-2012 – Dan Denning

The Revival of US Manufacturing: An Update
20-10-2012 – Chris Mayer

Australia’s ‘Eggs-in-One-Basket’ Banking Sector
19-10-2012 – Dan Denning

5 Comments

  1. TheForms says:

    Yeah, “extinction event” unless of course you go short. Happy days methinks.

  2. TheForms says:

    Yeah, “extinction event” unless of course you go short. Happy days methinks.

  3. Milan says:

    Money ( gold and silver) never dies, only currency (funny money, paper, printed stuff, digital) dies. Gold and silver have been money for 5000 years and will continue for another five thousand more.

  4. Ross says:

    As if we didn’t have the tools to fight back on the inflated AUD….

    You could knock 10 points off the AUD immediately with a NSW government announcement that they will immediately start resuming all the single story inner residential properties evenly without favour within a 10km radius, appointing themselves as the developers – and limiting the land use density/consolidation profits to ensure create increased affordability and induce lower metro wide market prices. Aggregated blocks would be released to a returned species called “project builders” on reprofiled streets for mixed-medium-high density development.

    This is similar to the leadership of the Menzies cabinet in the 50’s after the Korean War (albeit in lower-medium density housing in the Sydney lower Eastern suburbs & controlling the State by means of grant/loan money).

    Likely the “investors” would immediately go after the 4 pillars in response, but you would be less worried by the AUD upside, and more worried about the downside. Perhaps if we named the streets after sunk US WWII warships like they did in the Maroubra project building area they would go easy on us?

    http://www.dictionaryofsydney.org/entry/suburban_sydney

  5. gtaz says:

    So right about gluttony in the modern era. I have to have the best now, what i cant pay outright. Thats ok i will get a loan. I remember my parents int the eighties scrimping and saving on one wage. They didnt even contemplate a loan for anything other than their home. But now its the mcmansion that is so big it covers the whole yard and needs a cleaning crew to keep it maintained, the best high cost posh schools for the kid. God forbid they should go to a local state school. Dont get me started on private health cover, motor vehicles and other materail possessions. Maybe what australia really needs is a hard recession and some high unemployment to curb his gluttony?

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